Amazon.com (Nasdaq: AMZN) is a force to be reckoned with in today's music industry. According to a fresh market report from the NPD Group, the house that Jeff Bezos built now sells as much music as mighty Wal-Mart Stores (NYSE: WMT), though Apple (Nasdaq: AAPL) still leaves them both far behind.
What's the story?
Wal-Mart and Amazon accounted for 12% each of the total music market last quarter, says NPD. They're just doing it in different ways: Sam Walton's retail machine simply sells CDs, while Amazon peddles both digital downloads and mail-order discs. And of course, Apple's iTunes store is all digital, all the time.
The NPD report is not based on wallet-spend volumes, but rather a unit-based calculation that treats every 12 individual song downloads as the equivalent of an album. You could argue that the rise of single-track downloads is hurting the music industry, because consumers have no incentive to pay more for filler tracks they might not want to hear. However, I'd assert that the ability to cherry-pick only the good stuff inspires music lovers to buy more music, or at least just as much as before: one song here, another one there, mix-tape style.
All the young dudes
Apple's mighty 28% market share is a testament to the power of instant gratification and a user-friendly ordering system. But it's far from the only game in town, as Amazon actually increased its digital market share by 4 percentage points, while Apple's held steady with a mere 1% gain. Google (Nasdaq: GOOG) is launching a music store, too, and you have to believe that Big G's far-reaching marketing powers can make it a contender very quickly. There's money to be made in the world of music; Amazon and Google would be stupid to pass up this market opportunity.
Exceeding Apple's dominant 70% share of digital music sales may not be possible, and it will take years to even come close. Then again, Google doesn't mind shunting sales to both Amazon MP3 and iTunes through the music videos shown on YouTube. Maybe total domination isn't Google's goal here.
The other side of the tracks
Conversely, it would behoove traditional retailers to take Amazon's lead and start selling a little bit of every available format. Best Buy (NYSE: BBY) owns digital subscription service Napster, which does offer a limited form of permanent downloads. But that's an afterthought, not a business model. Wal-Mart has a digital music store, too, but when was the last time you saw any kind of promotion behind it? Management apparently lacks the confidence to throw its weight behind digital music; as a result, Wal-Mart doesn't even register on NPD's radar today. What a shame.
Apple's only weakness
Maybe Apple's worst enemy is its own immense power in this sector. The U.S. Department of Justice is allegedly sniffing around Cupertino for signs of monopolistic behavior.
Apple has applied pressure on major music labels like Sony (NYSE: SNE) Music to stop feeding pre-release material to Amazon for the e-tailer's "Daily Deal" promotion. That is a fact, reported by label executives and Amazon representatives alike. Now the question is whether Apple is within its rights to act like a schoolyard bully.
The investigation brings back not-so-fond memories of Microsoft (Nasdaq: MSFT) in the 1990s, though I would be flabbergasted if the Feds forced Apple to change iTunes as dramatically as Microsoft had to adjust Windows. A firm slap on the wrist looks more likely. Then Apple will get back in the ring with Amazon, Google, and everybody else to continue the battle royale.
This way to the future
A digital music seller with the power to beat Wal-Mart was just a silly dream a couple of short years ago. Now, there are two e-commerce solutions beating the Waltons at their own game. Is there any doubt anymore that modern consumers prefer the easy browsing, immediate satisfaction, and scratch-proof format of a well-stocked digital catalog? The concept works, and old-world dinosaurs like Best Buy and Wal-Mart are starting to look silly for not going after this market with gusto.
Apple's enormous slice of the pie notwithstanding, Amazon is the one company truly doing music sales right. There are real CDs for customers who like to own a physical artifact with artwork and liner notes, and a full-featured MP3 store for the rest of us. Amazon is busy on many fronts, from cloud computing to e-books and back again, but its music store is becoming a very valuable contributor to its whole operation.
Will Amazon MP3 ever pass iTunes in popularity? Stranger things have happened, I suppose. Get the discussion started in the comments below.
